One of the great riddles of the past few years is whether Netflix is friend or foe to the U.S. television industry, including broadcast TV networks, cable TV networks and pay-TV operators. Over the years, Netflix has downplayed in many ways its disruptive potential to the TV industry (my personal favorite is when CEO Reed Hastings would say "We're more of a bicycle to their car" in comparing Netflix to pay-TV).
But with Netflix tacking on another 2.3 million subscribers in the U.S. in Q1 '15, bringing its total to 41.4 million, the question is taking on increasing urgency. How should the TV industry REALLY think of Netflix? Below I share what I think are the best "friend" and "foe" arguments, concluding with my own assessment of what Netflix really is now.
Without question, the strongest "friend" argument is purely financial: Netflix has licensed billions of dollars of content from studios and TV networks. At a time when syndication revenues have been pressured, the windfall from Netflix and other OTT providers has been hugely beneficial, at least short-term, to studios and networks. Beyond the financial, some showrunners like Vince Gilligan ("Breaking Bad") have attributed their programs' success to groundswells of prior seasons binge-viewing that occurred on Netflix.
Meanwhile, pay-TV operators, who are also among the biggest broadband ISPs, have also clearly benefited, as Netflix and other OTT services have driven broadband adoption and the need for faster speeds. Broadband is a high-margin business for operators, so oddly, Netflix has helped operators become more profitable. Last but not least, as I outlined a year ago, the prospect of operators making deals to bundle Netflix gives operators leverage in their negotiations to slow broadcast and cable TV network rate increases.
While those licensing deals have been fattening studios' and TV networks' bottom lines, they've also been improving the quality of Netflix and other OTT providers' content, in turn creating better subscriber experiences. With time being finite, eventually Netflix viewing had to come out of the hide of TV viewing.
That began happening at least as far back as Q3 '14, when Nielsen reported viewership declines across all age groups (with 18-24 year-olds' viewing dropping 19.2% year-over-year). These declines have continued into this year, with kids' cable networks down 18% in Q1 '15, according to Bernstein Research. Recently, the cable industry's ad association blamed 40% of cable networks' audience declines on Netflix and others. Needless to say, all of this is putting unprecedented pressure on TV advertising, as the upfronts unfold.
The continued gusher of licensing revenue is uncertain, as Netflix shifts more of its content budget to creating originals, which it can stream globally. Netflix will have 320 hours of originals in 2015, 3x what it had in 2014. Of course, this is how Netflix intends to compete with HBO. But it also shows how much less reliant on third-party content Netflix is becoming.
Over the past few months, and on Netflix's earnings call last week, CEO Reed Hastings has been shifting his message to suggest it's the broader pay-TV bundle he now sees as the real competition. Whereas cord-cutting has been muted (the U.S. pay-TV industry lost only 220K subscribers in the past 2 years, even as Netflix added millions), a strong Netflix offering, combined with HBO Now and others, could drive higher cord-cutting and cord-nevering. With online video now watched by one-third of Americans via connected TV devices every day, Netflix is clearly becoming a force in the living room as well.
As we can see, there are pretty strong arguments for Netflix as both a friend and foe to the TV industry. From my perspective, I think Netflix has been mainly a friend to date, albeit with a hint of being wolf in sheep's clothing. I see this rapidly changing, especially as Netflix's originals position it more as a competitor to TV networks. Operators could benefit if they decide to strike deals to carry Netflix, though given their wariness, these seem unlikely.
More probable is that cord-nevering and cord-cutting are going to increase, as Netflix plus others (especially HBO Now) create attractive, inexpensive alternatives for entertainment-only, younger and budget-minded viewers. In this light, Netflix is looking more like a foe for both TV networks and operators going forward.